Government attitude and definition

There is no statute or guidance from the Korean regulatory authorities that provides a coherent insight on how cryptocurrencies would be classified under Korean law. The Financial Supervisory Service (the “FSS”) issued a press release on June 23, 2017 where it announced its views on what cryptocurrencies are not from a financial regulatory perspective. Namely, the FSS’s position was that cryptocurrencies are not considered: (i) fiat currencies; (ii) prepaid electronic means or electronic currencies; or (iii) financial investment instruments. Unfortunately, the FSS press release did not provide any guidance on how cryptocurrencies are classified and in what legal form.

However, the Supreme Court of Korea ruled on May 30, 2018 that cryptocurrencies can be confiscated as criminal proceeds. This decision represents the first time the Supreme Court recognised cryptocurrency as property. However, given the narrow scope of its interpretation, it is unclear what impact this ruling will have on subsequent cryptocurrency regulations in Korea.

The classification of cryptocurrencies from a legal perspective has just begun in Korea and will likely develop in the near future. Other Korean regulatory authorities may have a different view from the FSS’s announcement and the legal classification of cryptocurrencies. As a result, there is currently no law or clear guidance from any regulatory authority in Korea that provides clarity on the legal issues relating to cryptocurrencies and how they will be treated under Korean law.

Based on recent events, the Korean government has shown a mixed view on its attitude toward cryptocurrencies. Set forth below are key announcements by the Korean government regarding cryptocurrency.

Margin trading

On September 1, 2017, the Financial Services Commission (“FSC”) banned individuals from borrowing funds or cryptocurrency from cryptocurrency exchanges in order to sell them. The FSC declared that such practice violated existing Korean lending/credit laws. The FSC also directed financial institutions to halt all transactions and partnerships that enabled these practices.

ICO ban

On September 4, 2017, the FSC issued a press release banning initial coin offerings (“ICOs”) that violate the Financial Investment Services and Capital Markets Act (“FSCMA”), the main securities law in Korea. However, this press release did not explain how and in what context ICOs would be a violation of the FSCMA. The financial regulators’ initial position was to penalise ICOs where the tokens are offered in the form of a securities issuance (i.e., the token is classified as a security). Thereafter, on September 29, 2017, the financial regulators announced through a press release that any type of ICOs, including those in the form of securities, would be prohibited.

If coins or tokens are classified as “securities” under the FSCMA, ICOs or token offerings will be subject to the offering restrictions in Korea under the FSCMA. Where the coins or tokens are not classified as “securities” under the FSCMA, though there are no legal grounds for the prohibition and/or enforcement unless there is a violation of existing Korean laws and regulations, there is a possibility that Korean regulators could challenge the legality of the ICO or token offering based on this press release.

Real name verification

On September 4, 2017, the FSC announced it would initiate an identification policy for accounts in cryptocurrency exchanges that required cross-checking user names and account numbers. Accordingly, a “Real Name Verification System” was introduced from January 30, 2018. Under this system, existing anonymous account users can only withdraw money and not make any further deposits. All new users would have to provide actual identification information to open cryptocurrency accounts.

Central bank-backed cryptocurrency

On January 9, 2018, the Bank of Korea (“BOK”) launched a task force on cryptocurrency and is reviewing a central bank-backed cryptocurrency as part of the project. In addition, various local governments in Korea are exploring the option of issuing their own cryptocurrency.

Cryptocurrency regulation

There is no existing regulatory regime or statute that specifically regulates cryptocurrency. However, the Korean regulators are likely to apply and/or enforce the existing Korean laws and regulations for cryptocurrencies.

Existing laws

For example, in an ICO, if tokens are classified as “securities” under Korean law, the tokens will then be subject to the offering restrictions in Korea under the FSCMA. Or, even if the tokens are not classified as securities, if the marketing of the tokens in an ICO raises funds from the public with a promise to return the original investment amount, or an amount exceeding such investment in the future, the ICO could be regulated by the Act on the Regulation of Conducting Fundraising Business without Permission.

Pending bills

Currently, there are several cryptocurrency bills proposed at the National Assembly. These bills generally cover, among others, licensing requirements for cryptocurrency businesses, anti-money laundering requirements, consumer protection, cybersecurity requirements for cryptocurrency exchanges, and damage compensation for consumer losses. It is unclear when or if these pending bills, in their current form, will be enacted into law in Korea.

Sales regulation

As explained above, if tokens are classified as “securities”, the tokens will be subject to the offering or sales restrictions in Korea under the FSCMA. Whether a token will be classified as a security will depend on the facts and circumstances of the offering of the tokens. Under the FSCMA, an offer or sale of securities (tokens) to 50 or more non-accredited investors (excluding professional investors) would be regarded as a public offering and be subject to offering restrictions under the FSCMA. In a public offering of securities (tokens) in Korea, an onshore or offshore issuer must file a securities registration statement for the securities (tokens) to be offered in Korea with the FSC.

However, cryptocurrencies such as Bitcoin have not been classified as securities at this time, and have not been subject to the FSCMA. Also, cryptocurrencies are not yet explicitly subject to the commodities laws in Korea. Therefore, it is unclear which laws would regulate the sale of Bitcoin or other tokens since there has not been any application of Korean laws thus far to the sale of Bitcoin or other tokens.

Taxation

The Ministry of Strategy and Finance has announced that plans for the taxation of cryptocurrency are being developed but no decisions have been made. Meanwhile, the National Tax Service (“NTS”) published its preliminary assessment of taxation on cryptocurrency after its 2017 annual forum. This assessment is not official policy but is the only published position/research on cryptocurrency taxation by the Korean government.

Money transmission laws and anti-money laundering requirements

Cryptocurrency exchanges are not subject to Korea’s anti-money requirements under the Act on Reporting and Use of Certain Financial Transaction Information (“AML Act”). There is, as discussed above, a pending bill at the National Assembly that would require anti-money laundering obligations for cryptocurrency exchanges under the AML Act. Currently, anti-money laundering obligations of cryptocurrencies are enforced through financial institutions linked with cryptocurrency exchanges.

From January 30, 2018, financial institutions doing business with companies that handle cryptocurrencies (e.g., cryptocurrency exchanges) must comply with the Anti-Money Laundering Guidelines for Cryptocurrencies (“AML Guidelines”) issued by the Korea Financial Intelligence Unit. The notable requirements in the AML Guidelines are as follows:

1. Real-name verification required for fiat withdrawal from and deposit to cryptocurrency exchanges

Fiat withdrawals from and deposits to a cryptocurrency exchange are available only if the exchange user’s bank account is verified under the Real Name Verification System provided by financial institutions (e.g., banks), as explained above. Financial institutions may decline transactions with cryptocurrency exchanges that do not comply with this requirement. It also bans minors under the age of 18 and foreigners from opening new cryptocurrency accounts.

2. Customer due diligence

Financial institutions must implement a due diligence process to confirm whether any of their customers is a cryptocurrency exchange. Financial institutions must verify certain additional information enumerated in the AML Guidelines by conducting due diligence of the cryptocurrency exchange at least every six months.

Examples of such additional information include whether the cryptocurrency exchange: (i) checks the identity of its users; (ii) maintains a separate transaction record for each user; and (iii) is in compliance with the cryptocurrency-related policies issued by the government.

3. Suspicious transaction reports

If there is a transaction which falls under the suspicious transaction types, financial institutions must review and file a suspicious transaction report. Financial institutions must also appoint a staff member dedicated to monitoring suspicious cryptocurrency transactions. Suspicious transaction types include: (i) financial transactions between cryptocurrency exchanges and corporate entities or organisations; (ii) if the amount of financial transactions between a cryptocurrency exchange and a single user is KRW 10 million or more within one day or KRW 20 million or more within a seven-day period; and (iii) if the number of financial transactions between a cryptocurrency exchange and a single user is five times or more within a day, or seven times or more within a seven-day period.

Promotion and testing

The Korean government conceptually differentiates cryptocurrency from blockchain technology. While some regulations to curb speculative investment in cryptocurrency have been introduced, the Korean government has highlighted the innovative nature of blockchain technology in many different industries. The Korean government has also expressed its interest in fostering, promoting, and investing in blockchain technology as part of its strategic and economic plans for Korea to be a leader in the 4th Industrial Revolution.

Ownership and licensing requirements

Though there is no specific law that prohibits the registration of cryptocurrency-related investment funds, it is unclear whether the Korean financial regulators will be receptive to cryptocurrency-related investment funds. As a result, currently, there are no cryptocurrency-based investment vehicles and funds registered with the Korean financial regulatory agencies.

Investment advisors

Investment advisors need to be licensed in Korea to provide investment advice on financial investment products. Nevertheless, since the financial regulatory agencies have announced a position that cryptocurrencies are not financial investment products, there are currently no licensing requirements for investment advisors on cryptocurrency investments.

Licensing requirements

Korean financial authorities have taken the position that as cryptocurrency (or a cryptocurrency asset) is not a financial investment product, financial institutions (including fund managers and investment advisors) licensed under FSCMA may not invest in cryptocurrencies. If such regulatory position becomes law, a cryptocurrency investment fund will unlikely require a licence from the FSC under the FSCMA. However, the current regulatory perspective by the Korean regulatory agencies on such characterisation of cryptocurrency assets may change, or other agencies may announce contradicting views. Or, there may be court decisions that are contrary to the current views by the Korean regulatory agencies.

Mining

There are no explicit laws and regulations that regulate “mining” of bitcoins or other cryptocurrencies in Korea. However, based on an actual case in Korea, it is illegal for mining companies to move in and mine at industrial complexes to take advantage of discounted electricity fees for certain manufacturing companies.

Border restrictions and declaration

There are no explicit border restrictions or obligation to declare cryptocurrency holdings. However, for fiat currencies, remittance of funds out of Korea to an overseas account is governed under the Foreign Exchange Transaction Act (the “FETA”) and the Foreign Exchange Transactions Regulations. As a general principle under the FETA, there must be a “legal basis” (e.g., loan repayment, dividend payments, sale proceeds payment, etc.) along with supporting documents as prescribed under the FETA to repatriate funds overseas. The FETA prescribes certain procedures and documents for each type of transaction listed in the FETA for both the remitter of funds and the bank handling the remittance. Each type of transaction has different procedures and requirements to remit funds overseas.

Nonetheless, there are no guidelines under the FETA for cryptocurrency transactions. As a result, it is not permitted to remit fiat currency funds from cryptocurrency transactions overseas. Generally, any person engaging in a cross-border capital transaction must file a foreign exchange report under the FETA with, and obtain approval from, the BOK or a designated foreign exchange bank for all remittances exceeding the limit of US$ 3,000 per transaction, or a yearly aggregate limit of US$ 50,000 from Korea to other countries. In practice, however, Korean banks have declined to process wire transfers overseas when they are related to cryptocurrency trading, even if the amounts do not exceed the monetary limits and would not trigger reporting requirements to the BOK/designated foreign exchange bank.

Reporting requirements

No. There are no explicit laws and regulations for cryptocurrency payments. For overseas payments using cryptocurrencies, there are no reporting requirements at this time to any Korean regulatory agency. However, there are requirements being developed by the Korean financial regulators that may require a filing requirement with the BOK for foreign exchange purposes.

Estate planning and testamentary succession

As discussed in the Taxation section above, cryptocurrency is taxable under current Korean law for inheritance and gift tax. The tax rate would be 10%–50%. The NTS, however, has indicated the need to develop accounting standards for cryptocurrencies to further develop their taxation.

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